Retirement Guys: Avoid costly beneficiary mistakes

It’s hard for people to imagine the time when they will no longer be here on Earth. When we do think about it, we automatically assume that our will and estate plans will take care of everything. This, in fact, is not always the case. Instead, oftentimes, financial assets such as life insurance, retirement accounts and annuities have named beneficiaries and are typically paid outside of the estate.

Having these forms updated and filled out incorrectly could mean some assets will go to someone other than who you thought. Those assets could also be subject to taxes, fees and additional expenses. Most of these common mistakes can be avoided by reviewing and updating beneficiary forms every few years and upon life changes. Unfortunately, many families find out too late.

One of the most famous cases of a beneficiary mistake is known as the Pension Pickle. Anne Friedman, a school principal in Brooklyn, N.Y., had been married to her husband, David, for nearly 20 years. Unfortunately, she had a heart attack and passed away. David assumed he was the beneficiary of his wife’s $900,862 state teacher retirement account.

Upon trying to collect as the spouse, he was shocked to find out that his wife had filled out her beneficiary form 27 years ago. This was four years before Anne and David even met. Anne never took the time to update her beneficiary form, on which she named her mother, uncle and sister as beneficiary.

Anne’s mother and uncle had already passed away, leaving the nearly $1 million to her sister. And as you might have guessed, Anne’s sister was not too inclined to give David the money.

The case went all the way to the Supreme Court, which ruled in favor of the sister, saying it could only go by what Anne had put in writing on her beneficiary form regardless of what her will stated.

Throughout the years, Mark and I have spent a lot of time educating local residents and advisers around the United States about the importance of properly named beneficiary designations. In meeting with hundreds, if not thousands, of people we have discovered some of the most common mistakes that people make with their forms.

A major mistake many people make is assuming the custodian or the company your account is with has the correct information on file. A family should keep copies of beneficiary forms along with their other important documents. If you don’t have the forms in a handy location for all of your financial and insurance accounts, call each company and request that they send you a copy of the beneficiary designation form they have on file. Don’t just ask them on the phone for the information, get it in writing.

Neglecting the recent law changes for retirement accounts could also be a major mistake. Under the old rules, when money was left to anyone besides a spouse, very limited payout options were available. This often created a lump sum fully taxable distribution, resulting in taxes of 41 percent or more of the retirement account. That is correct. In a blink of an eye, nearly half of the retirement account can be gone in the form of taxes.

New rules known as multigenerational or stretch-out options exist that can help avoid this tax trap. Yet these rule changes are voluntary, not mandatory. It is important to check with the custodian of the retirement accounts to find out if they offer multigenerational retirement accounts or stretch-out options upon death.

If the company does offer multigenerational options, it is important to check to see if your signed custodian documents are updated with the new rules. Just because they offer it now doesn’t mean the account that was set up before the rules existed will be automatically updated. Again, get it in writing.

Other common issues we see usually affect grandchildren, same-sex partners and blended families. Each situation is unique and wishes can vary from one family to another.

For a complete list of the 15 common mistakes we see families make along with a checklist you can use at home, visit www.retirementguysradio.com. Remember, beneficiary forms cannot be changed after the fact.

For more information about The Retirement Guys, tune in at 1 p.m. every Saturday on 1370 WSPD or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA/SIPC. NEXT Financial Group Inc. and its representatives do not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, 43537. (419) 842-0550.